NOTICE OF SPECIAL MEETING OF SHAREHOLDERS John Hancock Variable Insurance Trust Lifestyle Aggressive Trust Lifestyle Growth Trust Lifestyle Balanced Trust Lifestyle Moderate Trust Lifestyle Conservative Trust The John Hancock Variable Insurance Trust is holding a special meeting of shareholders of the Lifestyle Trusts: When Wednesday, December 4, 2013 10:00 a.m. Eastern Time Where John Hancock Variable Insurance Trust 601 Congress Street Boston, Massachusetts 02210 What the meeting will cover 1. Approval to change the investment objectives and strategies of the Lifestyle Trusts. This change would allow the Lifestyle Trusts to be invested in a way that seeks to: manage volatility of returns, and limit the magnitude of portfolio losses. 2. Approval to make a change to the subadvisory agreement between John Hancock Investment Management Services, LLC (the Trust s investment adviser) and John Hancock Asset Management (the subadviser). This change would increase the subadvisory fee paid to the subadviser to implement the new strategy. The change will not increase the advisory fees you pay. Instead, the investment adviser will pay the increased fee to John Hancock Asset Management from its current advisory fee. 3. Any other business that may properly come before the meeting. The board of trustees unanimously recommends you vote FOR the two proposals. This is an important meeting You are entitled to vote if you were a contract or policy owner invested in a Lifestyle Trust as of the close of business on October 6, 2013, the record date as set by the board of trustees. The enclosed proxy statement tells you about the meeting, the proposals you will be voting on and the voting process. You can also download a copy at www.jhannuities.com/loc. 1. Read through the proxy statement and decide how you want to vote. 2. Vote in one of three ways (see About voting on page 19 for details): complete the enclosed voting instruction form and mail it to the address provided, give voting instructions by touch-tone telephone by calling (800) 690-6903, or go online to www.proxyvote.com and submit your voting instructions. If you submit your voting instructions and then change your mind, you can revoke your voting instruction. Proxy materials are being mailed to contract and policy holders on or about October 31, 2013. By order of the board of trustees of John Hancock Variable Insurance Trust, Sincerely, Betsy Anne Seel Assistant Secretary John Hancock Variable Insurance Trust October 31, 2013 Boston, Massachusetts
John Hancock Variable Insurance Trust Lifestyle Aggressive Trust Lifestyle Growth Trust Lifestyle Balanced Trust Lifestyle Moderate Trust Lifestyle Conservative Trust PROXY STATEMENT October 31, 2013 SPECIAL MEETING OF SHAREHOLDERS We are holding a special meeting of shareholders on December 4, 2013 about two proposed changes that affect the management of the Lifestyle Trusts. Please take some time to read this proxy statement to learn more about the two proposals and decide how you want to vote. Your vote is important. When Wednesday, December 4, 2013 10:00 a.m. Eastern Time Where John Hancock Variable Insurance Trust 601 Congress Street Boston, Massachusetts 02210
Contents 1.Why you are receiving this document... 1 2 What the meeting is about... 2 About Proposal 1... 3 1. What are the proposed changes?... 3 2. What is portfolio volatility and why is managing it important? How does it relate to limiting the magnitude of portfolio losses?... 3 3. What exactly are the proposed changes?... 5 4. Would the new strategy seek to protect against high fixed income volatility and fixed income losses?... 7 5. Why are these changes being proposed now?... 7 6. What should I consider in deciding how to vote?... 7 7. Who would implement the new investment strategy?... 8 8. Will there be an increase in the advisory fee to be paid by my Lifestyle Trust?... 8 9. How might these changes benefit me?... 8 10. Are there potential disadvantages to the changes?... 8 11. Are the advantages and disadvantages the same for all investors?... 9 12. Do I have other investment options if I feel the new Lifestyle Trust s investment objective and policies are not appropriate for me?... 9 13. What are the risks of implementing these investment objective and policy changes?... 10 14. How do these changes impact the John Hancock Life Insurance Companies?... 11 15. Do the changes involve competing interests between contract and policy owners and their insurance companies?... 11 16. Has the board approved these changes and, if so, what did it consider when giving its approval?... 12 17. If these changes are approved by shareholders, when would they be implemented?... 13 18. How does the board recommend that I vote on Proposal 1?... 13 About Proposal 2... 14 1. Will my advisory fees increase as a result of the proposal?... 14 2. Why is the subadvisory fee changing?... 14 3. What is the current subadvisory fee?... 14 4. What is the proposed subadvisory fee?... 14 5. Who will pay the increase?... 15 6. How much was paid in subadvisory fees last year?... 15 7. What are the terms of the subadvisory agreement and the proposed change?... 15 8. How is the subadviser organized?... 15 9. Does the subadviser manage other funds with a managed volatility strategy?... 16 10. Has the board approved this subadvisory fee increase and, if so, what did it consider when giving its approval?... 16 11. How does the board recommend I vote on Proposal 2?... 17 3 About voting Who can vote... 19 How to vote... 19 How the votes are counted... 19 Changing your vote... 20 4 About John Hancock... 21 5 Appendices Appendix A Revisions to investment objectives, investment strategies and principal investment risks... A-1 Appendix B Outstanding shares and share ownership... B-1 Appendix C Form of Amendment to Subadvisory Agreement... C-1
Why you are receiving this document We are sending you this proxy statement and a voting instruction form because you owned a variable annuity or variable life contract or policy with underlying investments in shares of John Hancock Variable Insurance Trust (the Trust ) as of the close of business on October 6, 2013. We are holding a special meeting of shareholders The special meeting of John Hancock Variable Insurance Trust shareholders will be held at 601 Congress Street in Boston on December 4, 2013. You have the right to vote The board is asking you to vote on two proposals that affect the management of the five Lifestyle Trusts. 1. A change to the investment objective and strategy of each Lifestyle Trust designed to help each Lifestyle Trust seek to manage volatility of returns and limit the magnitude of portfolio losses. 2. An amendment to the subadvisory agreement between John Hancock Investment Management Services, LLC (the Trust s investment adviser) and John Hancock Asset Management (the subadviser), with respect to each Lifestyle Trust. This change would increase the fee paid to the subadviser to implement the new investment strategy of each Lifestyle Trust. The change will not increase the advisory fees you pay. Instead, the investment adviser will pay the increased fee to John Hancock Asset Management from its current advisory fee. These proposals do not change the current features, benefits or guarantees of your contract or policy, and do not increase the advisory fees you pay. See About Proposal 2 on page 14 for details. If the new strategy is approved but you feel it is not appropriate for you, other options are available to you. Talk to your financial adviser about the other investment options available to you. Your vote is important This document tells you about the special meeting, the proposals you will be voting on and the voting process. 1. Read through this document and decide how you want to vote. 2. Vote in one of three ways (see About voting on page 19): complete the enclosed voting instruction form and mail it to the address provided, give voting instructions by touch-tone telephone by calling (800) 690-6903, or go online to www.proxyvote.com and submit your voting instructions. Thank you for investing in John Hancock Variable Insurance Trust The board has approved the proposals described in this proxy statement and authorized us to send it to you. The Trust is soliciting your voting instruction by mail. You may also be contacted in person or by phone by one of its officers or employees, agents or affiliates. The investment adviser pays the cost of the proxy materials and for soliciting your voting instruction. Proxy materials are being mailed to contract and policy holders on or about October 31, 2013. By order of the board of trustees, October 31, 2013 Boston, Massachusetts 1 In this document: we, us, our and Trust mean John Hancock Variable Insurance Trust you and your mean owners of variable annuity or variable life contracts or policies with underlying investments in a Lifestyle Trust meeting and special meeting mean our December 4, 2013 special meeting of shareholders board means our board of trustees record date means October 6, 2013 (as set by the board according to the terms of the Trust s Agreement and Declaration of Trust) variable annuity refers to any variable annuity, variable life or group annuity contract or policy with underlying investments in a Lifestyle Trust investment adviser means John Hancock Investment Management Services, LLC standard deviation of returns means the measure of return dispersion around the mean (average) return and depicts how widely returns varied over a certain period of time risk adjusted return means the return an investment provides given the level of risk associated with the investment, as measured by the Sharpe Ratio; this is a performance statistic that measures reward per unit of risk. The higher the Sharpe Ratio, the better a fund s risk adjusted performance. John Hancock Variable Insurance Trust includes five mutual fund portfolios or funds of funds (called the Lifestyle Trusts) that cater to different investor risk tolerances: Lifestyle Aggressive Trust Lifestyle Growth Trust Lifestyle Balanced Trust Lifestyle Moderate Trust Lifestyle Conservative Trust We are a no-load open-end investment company, commonly known as a mutual fund, registered under the Investment Company Act of 1940, as amended (the 1940 Act). Our office is located at 601 Congress Street, Boston, Massachusetts 02210. See About John Hancock starting on page 21 for more information about the John Hancock companies affiliated with the Trust.
What the meeting is about The board is asking you to vote on two proposals that affect the management of the Lifestyle Trusts. These proposals do not change the current features, benefits or guarantees of your contract or policy, and do not increase the advisory fees you pay. Proposal 1. Approval of changes to the investment objectives and strategies of Lifestyle Aggressive Trust, Lifestyle Growth Trust, Lifestyle Balanced Trust, Lifestyle Moderate Trust and Lifestyle Conservative Trust. 2. Approval of an amendment to the subadvisory agreement between John Hancock Asset Management and John Hancock Investment Management Services, LLC to increase the subadvisory fee payable by John Hancock Investment Management Services, LLC to John Hancock Asset Management. The proposed subadvisory fee increase will be borne solely by John Hancock Investment Management Services, LLC and will not result in any increase in advisory fees borne by the Lifestyle Trusts or their shareholders. Fund or class of shareholders solicited Shareholders of each Lifestyle Trust will vote separately on Proposal 1. Shareholders of each Lifestyle Trust will vote separately on Proposal 2. 3. Any other business that may properly come before the meeting. Shareholders will vote separately on any other business specific to a specific Lifestyle Trust. Proposal 1 Approval to change the investment objectives and strategies of the Lifestyle Trusts (see page 3) This change would allow the Lifestyle Trusts to be invested in a way that seeks to: manage volatility of returns, and limit the magnitude of portfolio losses. Proposal 2 Approval to make a change to the subadvisory agreement between the Trust s investment adviser and subadviser (see page 14) The advisory fee provided to the investment adviser, which the shareholder pays, will not increase. We are seeking approval of an increase in the payment from John Hancock Investment Management Services, LLC (the Trust s investment adviser) to the subadviser, John Hancock Asset Management, to cover costs of managing the new strategy. The change will not increase the advisory fees you pay. Instead, the investment adviser will pay the increased fee to John Hancock Asset Management from its current advisory fee. What the board recommends The board of trustees recommends you vote FOR Proposal 1 and FOR Proposal 2. Proposal 1 will be implemented with respect to a Lifestyle Trust if the shareholders of that Lifestyle Trust approve Proposal 1, and regardless of whether Proposal 2 is approved. Proposal 2 will be implemented with respect to a Lifestyle Trust only if the shareholders of that Lifestyle Trust approve Proposal 1 and also approve Proposal 2. Shareholders of each Lifestyle Trust will vote separately on the proposals for their Lifestyle Trust, and approval of a proposal for one Lifestyle Trust will not be conditioned on approval of any other proposal for any other Lifestyle Trust. See About voting on page 19 for more information. Shareholder proposals for future meetings If a shareholder has a proposal the shareholder would like presented at a future shareholder meeting, the shareholder must send it to us a reasonable time before proxies are solicited for the meeting, to give us sufficient time to review it and consider including it in the proxy materials. We are not required to hold annual shareholder meetings, and have not set a date for the next meeting. 2
About Proposal 1 Approval to change the investment objectives and strategies of the Lifestyle Trusts to implement a managed volatility strategy The global financial crisis of 2008-2009, with its continuing uncertainty as to the global economic outlook, resulted in periods of significant volatility in the markets. This volatility or fluctuation in the markets and the associated depressed returns exceeded the risk tolerances of many investors. Investment in diversified mutual fund asset classes had historically tended to minimize overall performance fluctuation and reduce the risk of large losses. During the financial crisis, as uncertainty gripped many different financial markets and asset classes simultaneously, this approach did not manage this risk as it had previously. This experience has convinced us at John Hancock that an additional approach to diversify this risk is needed, and has prompted us to seek new methods to manage it. A managed volatility strategy is designed to address these challenges. This change would allow the Lifestyle Trusts to be invested in a way that seeks to: manage volatility of returns, and limit the magnitude of portfolio losses. The new investment strategy will not increase the advisory fees you pay. Instead, the investment adviser will pay an increased advisory fee payable to the Lifestyle Trusts subadviser in connection with the implementation of the new investment objective and strategy. The investment adviser will pay each of these fees from its current advisory fee, as described in Proposal 2. If the new investment objective and strategy are approved but you feel they are not appropriate for you, other options are available to you. Talk to your financial adviser about the other investment options available to you. The board recommends you vote FOR changing the investment objective and strategy of your Lifestyle Trust to implement a managed volatility strategy. The following questions and answers provide more information about the proposed changes. 1. What are the proposed changes? Owners of variable annuity or variable life contracts or policies with underlying investments in a Lifestyle Trust are being asked to approve changes to the investment objective and strategy of that Lifestyle Trust that would permit the portfolio to be invested in a manner seeking to: manage volatility of returns, and limit the magnitude of portfolio losses. These are two distinct but complementary elements of the proposed new investment strategy. 2. What is portfolio volatility and why is managing it important? How does it relate to limiting the magnitude of portfolio losses? Volatility is a measure of the variability in a fund s performance over time relative to its average historical return. Volatility reached unusually high levels during the recent financial crisis. The graph below compares short term volatility of returns (i.e., the rolling 12-month average volatility) of the S&P 500 Index (an equity index tracking 500 large capitalization companies in various industries) to the long term volatility of returns (i.e., the 13-year historical average volatility) from 2000 to 2012. As you can see from the graph, volatility tends to average near 15%. For most of the mid-2000s, volatility had been low. Then, in 2008, volatility surged to more than 30%. In recent years, it has settled back within a more typical range. 3
*Source: Morningstar Direct, 2013. The goal of managing volatility is to reduce the variability of equity returns over the long term (7 to 10 years). A portfolio that manages volatility will still experience gains and losses, but the degree of short term fluctuation of returns relative to the long term average return should be lessened. It is also important to understand that, even if volatility is managed successfully, and returns compared to their historical averages are smoothed out, a portfolio could still experience large losses, either in the short term or during a prolonged decline in financial markets. In addition, during periods in which securities markets rise rapidly, a portfolio that manages volatility may underperform a portfolio that does not use volatility management techniques. Seeking to manage volatility and limit the magnitude of portfolio losses, in each case with respect to the equity portion of each Lifestyle Trust s portfolio, are therefore two distinct but complementary elements of the proposed new investment strategy. These two elements of the strategy are described in question 3, below. The managed volatility strategy is designed solely to control the portfolio volatility within a target range regardless of the direction of equity markets. The strategy designed to limit portfolio losses is based on preserving the portfolio value during equity market declines. It is not based on portfolio volatility. During equity market declines, the strategy designed to limit portfolio losses will reduce exposure to equity markets and increase exposure to cash and cash equivalents, thereby reducing the portfolio's participation in further equity market declines. During positive equity markets, the strategy designed to limit portfolio losses should have a small or negligible impact on the portfolio. However, during equity market declines, the strategy designed to limit portfolio losses will reduce equity exposure and increase cash and cash equivalent exposure at an increasing rate in order to preserve the portfolio value. This will occur even if the portfolio volatility is within the target range. The strategy designed to limit portfolio losses is a complement to the managed volatility strategy because it is designed to preserve portfolio value during equity market declines regardless of the portfolio volatility. The investment adviser has advised the board that it believes a combination of the two elements is important to optimize long term risk adjusted returns. Note also that at any given point in time, a managed volatility portfolio may outperform or underperform a portfolio with comparable objectives and strategies that does not seek to manage volatility. There can be no assurance that a Lifestyle Trust will be successful in managing portfolio volatility or limiting the magnitude of portfolio losses. See questions 9, 10 and 11 below for information about the potential advantages and disadvantages to you of investing in a portfolio seeking to manage volatility and limit the magnitude of losses. 4
3. What exactly are the proposed changes? Current approach The Lifestyle Trusts currently operate as asset allocation portfolios, investing primarily in other actively managed mutual funds offered by John Hancock. Each Lifestyle Trust normally invests a certain percentage of its assets in underlying funds that invest primarily in equity securities and a certain percentage of its assets in underlying funds that invest primarily in fixed income securities, except the Lifestyle Aggressive Trust which currently invests generally 100% of its assets in underlying funds that invest in equity securities under normal market conditions. The table below shows each Lifestyle Trust s current investment objectives and its target allocations to equity and fixed income funds. Allocations in normal circumstances are permitted to vary from the targets by as much as 10% in either direction. For example, Lifestyle Growth Trust s allocation to equity underlying funds may be as high as 80% or as low as 60%, while its allocation to fixed income underlying funds could be as low as 20% or as high as 40%. In certain unusual circumstances, a variance of more than 10% may be permitted temporarily. Current target allocations to underlying funds Lifestyle Trust Current investment objectives Equity funds Fixed income funds Lifestyle Aggressive Trust To seek long term growth of capital. Current income is not a consideration. Current permitted variance 100% 0% +/- 10% Lifestyle Growth Trust Lifestyle Balanced Trust Lifestyle Moderate Trust Lifestyle Conservative Trust To seek long term growth of capital. Current income is also a consideration. To seek a balance between a high level of income and growth of capital, with a greater emphasis on growth of capital. To seek a balance between a high level of income and growth of capital, with a greater emphasis on income. To seek a high level of current income with some consideration to growth of capital. 70% 30% +/- 10% 50% 50% +/- 10% 40% 60% +/- 10% 20% 80% +/- 10% Proposed changes It is proposed that: the investment objectives of each Lifestyle Trust be amended, as noted in italics in the table below, and the investment policies of each Lifestyle Trust be amended to permit each portfolio to be invested in a way that seeks to manage volatility of returns and limit the magnitude of portfolio losses. Lifestyle Trust Proposed investment objectives * Lifestyle Aggressive Trust Lifestyle Growth Trust Lifestyle Balanced Trust Lifestyle Moderate Trust To seek long term growth of capital while seeking to both manage the volatility of return and limit the magnitude of portfolio losses. To seek long term growth of capital while seeking to both manage the volatility of return and limit the magnitude of portfolio losses. To seek growth of capital and current income while seeking to both manage the volatility of return and limit the magnitude of portfolio losses. To seek current income and growth of capital while seeking to both manage the volatility of return and limit the magnitude of portfolio losses. Lifestyle Conservative Trust To seek current income and growth of capital, while seeking to both manage the volatility of return and limit the magnitude of portfolio losses. * The investment objectives of the Lifestyle Trusts are currently nonfundamental. If the proposal is approved, the investment objectives will remain nonfundamental and subject to change without shareholder approval. Each Lifestyle Trust would seek to manage the volatility of returns (as measured by annualized standard deviation of returns) within the volatility ranges noted in the table below. 5
Each Lifestyle Trust would also continue to allocate its assets between equity and fixed income mutual funds, as indicated in the table below. These allocations could vary from their targets in order to manage the portfolio to its volatility range. Each Lifestyle Trust would also invest in cash and cash equivalent investments as a third asset class. Each Lifestyle Trust would also use equity index and fixed income futures and similar instruments in a way such that actual exposure to each of the three asset classes could vary significantly. Lifestyle Trust Proposed target volatility range Proposed permitted variance in exposure to three asset classes Equity Fixed income Cash Lifestyle Aggressive Trust 15% - 18.5% 100% to 0% 0% to 100% 0% to 100% Lifestyle Growth Trust 11% - 13% 77% to 0% 0% to 100% 0% to 100% Lifestyle Balanced Trust 8.25% - 10.25% 55% to 0% 0% to 100% 0% to 100% Lifestyle Moderate Trust 7% - 9% 44% to 0% 0% to 100% 0% to 100% Lifestyle Conservative Trust 5.5% - 6.5% 22% to 0% 0% to 100% 0% to 100% Using a combination of these methods, the investment strategy would seek to reduce exposure generally to equity assets during periods of high anticipated and actual volatility in these asset classes and increase the exposure in less volatile periods. In extremely volatile equity markets, a Lifestyle Trust could have a very significant allocation to cash or cash equivalents. In addition, a Lifestyle Trust would expect to hold, on a continuing basis, a portion of assets in cash as collateral required to cover its obligations under the instruments used in its strategy. Historically, volatility of returns has been materially higher for equity mutual funds than fixed income mutual funds. At present, the focus of the new strategy is generally to reduce equity exposure in order to manage the volatility of the portfolio returns. In addition, if fixed income mutual fund volatility causes the overall portfolio to exceed its target by a significant margin, John Hancock Asset Management may reduce fixed income exposure by divesting fixed income mutual funds and reinvesting the proceeds in cash alternatives to attempt to reduce volatility. For example, during a period of extreme market volatility, a Lifestyle Trust s economic exposure to equity securities could be reduced to as little as 0% and its economic exposure to cash and cash equivalents could increase to as much as 100%. The table above illustrates the range of possible effects of the proposed strategy as applied to the current underlying fund allocation approach if the new investment objective and policy changes were to be approved. Actual volatility could vary from the ranges in the table. For example, during periods of prolonged low market volatility, the actual volatility experienced by a Lifestyle Trust will likely fall below the range due to maximum limits on equity and fixed income exposures. John Hancock Asset Management could adjust the ranges from time to time. John Hancock Asset Management may also elect to invest in fixed income derivatives in order to reduce the net fixed income exposure during periods of increased volatility within the fixed income markets. Passive strategies Each Lifestyle Trust currently can invest as much as 100% in passive strategies (such as index funds and index-like funds), instead of actively managed funds. This flexibility will continue whether or not shareholders approve the proposals. Funds using passive strategies generally do not attempt to use subjective judgments or technical analyses to outperform the market or avoid losses. Also, they tend to be more diversified than actively managed funds, so their performance may be less affected, positively or negatively, by the performance of particular issuers than a more concentrated actively managed fund. For a more complete description of the new objectives and strategies as they would appear in each Lifestyle Trust s prospectus, see Appendix A, which compares the current and proposed investment objectives and strategies. 6
4. Would the new strategy seek to protect against high fixed income volatility and fixed income losses? Not presently. While John Hancock Asset Management may reduce fixed income exposure in highly volatile or declining fixed income markets, it will do so only by divesting holdings of fixed income mutual funds and replacing them with cash. The new managed volatility strategy does not, however, otherwise seek to manage systematically the volatility of, or minimize the risk of losses on, fixed income holdings. The fixed income allocation will continue to be managed using the current investment objectives both prior to and following the implementation of the managed volatility investment strategy. John Hancock Asset Management will continue to use a diversified, multi-managed, multi-asset class approach to the fixed income allocation. John Hancock Asset Management will continue to seek to actively manage the risk within the fixed income allocation by periodically adjusting the asset class, duration and credit exposure in order to achieve the investment objective. If the portfolio experiences extreme fixed income volatility and losses as a result of the fixed income allocation, John Hancock Asset Management has the ability to redeem from the underlying fixed income funds in order to hold cash or cash equivalents. In the future, the managed volatility strategy or complementary risk management strategies may be employed to reduce exposure to fixed income securities volatility and minimize the magnitude of portfolios losses. 5. Why are these changes being proposed now? The following circumstances have prompted the investment adviser to make this proposal to the board: The global financial crisis of 2008-2009 and the continuing uncertainty about the global economic outlook resulted in periods of significant volatility in the markets. Diversified asset classes, such as equities and fixed income, historically had performed in an uncorrelated manner. That is, when equity securities had performed poorly, fixed income securities had generally tended to perform better, and vice versa. Using a mix of such uncorrelated asset classes historically had tended to reduce portfolio volatility and reduce the risk of large losses. During the global financial crisis, however, this approach did not manage volatility or limit the magnitude of losses as it had previously, as uncertainty gripped many different financial markets, and many asset classes that were expected to perform in an uncorrelated manner instead suffered steep declines simultaneously. As a result, many types of investors suffered unusually large losses. At the same time, interest rates were unusually low, resulting in little or even no returns on most conservative investment alternatives. Although it is uncertain whether these circumstances could occur again in the future, this experience has convinced many investors and investment management firms to look for new methods for diversifying risk, managing volatility of returns and limiting the magnitude of portfolio losses. The changes under Proposal 1 are aimed at helping John Hancock contract owners and policy holders achieve those goals, although there is no guarantee. John Hancock Life Insurance Company (U.S.A.) and John Hancock Life Insurance Company of New York (the John Hancock Life Insurance Companies) have advised the Trust that, if these objective and strategy changes are approved, the John Hancock Life Insurance Companies expect to benefit from potentially reduced financial exposure under their guarantees and correspondingly lower financial resources required to support these guarantees. 6. What should I consider in deciding how to vote? Before making your voting decision, you should consider the following factors, among others: whether the proposed changes are consistent with your investment goals and risk tolerance the impact of portfolio returns on future increases to current guarantees (see questions 10 and 11 for a discussion of potential advantages and disadvantages of the new strategy with regard to contracts with guarantees) potential alternatives to investing in the Lifestyle Trusts (see question 12 for additional detail regarding alternative investments available to you) the ability to transfer assets from the Lifestyle Trusts into different investments and the potential consequences of doing so (see question 12 for additional detail regarding transfer options) potential penalties if you surrender your contract or policy (see question 12 for additional detail regarding the financial consequences of surrendering a contract or policy) potential tax consequences if you surrender your contract or policy, and the potential effect that withdrawals can have on the liquidity of your contract or policy. 7
You should consult your financial adviser to help you assess your situation and determine whether your investment, contract or policy is still a suitable investment option for you. 7. Who would implement the new investment strategy? John Hancock Asset Management, a subadviser to each Lifestyle Trust, would implement the new strategy. The investment adviser and John Hancock Asset Management intend to engage Milliman Financial Risk Management, LLC (Milliman FRM) as a consultant to provide various volatility and risk models. Milliman FRM has extensive experience and expertise with managed volatility modeling, having provided such models since the late 1990s. Subject to the investment adviser s customary oversight, John Hancock Asset Management would have exclusive investment discretion with respect to the management of the new strategy. 8. Will there be an increase in the advisory fee to be paid by my Lifestyle Trust? No. There would be no increase in the advisory fee to be paid by any of the Lifestyle Trusts as a result of these changes. The subadvisory fee paid to the Lifestyle Trusts subadviser in connection with the implementation of the new strategy will increase. However, the investment adviser, not the Lifestyle Trusts or their shareholders, will pay the increased subadvisory fees, and will do so from its current advisory fee, as described in Proposal 2. In addition, at the board s request, the investment adviser has agreed to reimburse or waive certain fund expenses for each Lifestyle Trust for a period of three years following the implementation of the new investment objective and strategy. The investment adviser, and not the Lifestyle Trusts, will bear Milliman FRM s fees. 9. How might these changes benefit me? If this strategy is successful, the Lifestyle Trusts may experience superior risk-adjusted returns over the long term (7 to 10 years). In particular, data presented to the board indicates that, in periods of modestly or severely declining equity markets with high volatility, a Lifestyle Trust could provide superior risk adjusted returns relative to a comparable fund that does not use such a strategy. There is, however, no guarantee that the strategy will be successful or that these results will be achieved. A managed volatility strategy, designed to target a specific level of volatility, seeks to reduce the magnitude of losses during highly volatile, negative equity markets by decreasing the equity exposure and increasing a Lifestyle Trust s exposure to cash and cash equivalents, thereby reducing the participation in equity market declines. It is important to note that there may be periods when losses in the equity markets occur in low volatility environments. This is why seeking to limit the magnitude of portfolio losses, regardless of volatility, is a separate but complementary element of the new investment strategy. If the changes in the investment objective and policies of each Lifestyle Trust are successful in managing volatility and limiting the magnitude of portfolio losses, this could translate into higher contract or policy values for owners over the long term (7 to 10 years). This, in turn, could result in greater available balances for contract owner withdrawals as well as improved benefits under the various contracts and policies, such as surrender benefits, death benefits or withdrawal benefits. Finally, the increased use of passive investments (such as index funds and index-like funds) may decrease somewhat the indirect costs borne by the Lifestyle Trusts in the form of lower underlying fund expenses and are expected to facilitate the Lifestyle Trust s strategy as described above. In addition, the investment adviser has agreed to reimburse or waive certain fund expenses of each Lifestyle Trust for a period of three years following the implementation of the new investment objective and strategy. 10. Are there potential disadvantages to the changes? Yes. There are several potential disadvantages to the new investment strategy. For example, if the proposed investment objective and policy changes are implemented, a Lifestyle Trust may underperform funds that do not use the volatility management techniques during periods of strong positive market performance, particularly periods when such strong performance is combined with high volatility. This is because a managed volatility fund would, in these market conditions, have less exposure to equities and not participate fully in the larger upside returns during such a volatile period. Also, a Lifestyle Trust may underperform otherwise similar funds in periods of low volatility because the impact of hedging and other volatility management techniques may have the effect of reducing returns without any offsetting benefit in that environment. The vast majority of variable annuity contracts and variable life insurance policies with contract or policy values invested in the Lifestyle Trusts have embedded guarantees. Owners of these contracts are already paying for these guarantees through contract or policy charges, and therefore have 8
purchased some protection against large losses in their contract or policy benefits (but not necessarily all of the losses the proposed investment changes would seek to avoid). If you own a variable annuity contract with a guaranteed minimum withdrawal benefit (GMWB) and are expecting to draw benefits over a specific period of time or for life, or a variable life insurance policy with a guaranteed minimum death benefit and expect to use the policy as part of an estate plan, you may derive little benefit from the new investment strategy. You may be more likely to benefit from the new investment strategy if you are interested in benefitting from accumulated values under your policy or contract. Accordingly, you should consult with your financial and/or tax adviser to determine if the Lifestyle Trusts are still an appropriate investment option for your situation. Due to the tax deferred characteristics of the variable annuity contracts and policies, transactions at the fund portfolio level related to the new investment strategy should have no adverse tax consequences to you as a contract or policy owner. 11. Are the advantages and disadvantages the same for all investors? Not necessarily. When allocations to equities are reduced, the investment objective and policy changes have the potential to protect all contract and policy holders from declining and volatile equity markets. Similar effects may occur regarding fixed income markets. Based on information provided by the John Hancock Life Insurance Companies, the investment adviser has represented to the Lifestyle Trusts that it believes that all investors may benefit from potentially better risk adjusted performance of the Lifestyle Trusts they have selected if, as a result, they are able to accumulate higher amounts of contract value that could be available for withdrawals, application to an annuity option, enhancement of a death benefit, or other uses. The investment adviser has represented to the Lifestyle Trusts that owners of contracts and policies with certain types of guaranteed living benefits or guaranteed death benefits already have some degree of protection, through the operation of the guarantee, from market declines of the type the proposed strategy is designed to address. For example, owners of variable annuity contracts having a GMWB (as the majority of these contracts do) may be less vulnerable to such downturns than others because of the John Hancock Life Insurance Companies guarantee of an annual minimum income (i.e., withdrawal) amount. These contract owners may, therefore, benefit less from the proposed objective and policy changes than those that do not have these benefits. The higher the allocation to equities in a Lifestyle Trust, the larger the differences in returns likely would be between that Lifestyle Trust using this risk management strategy and an investment option that does not. Similar considerations apply to variable life insurance policies with guaranteed withdrawal or death benefits and group annuity contracts having guaranteed income for life features. Even among contract or policy owners who have the same guarantee, the John Hancock Life Insurance Companies have reported that there may be significant differences in these contract or policy owners actual account values in relation to their respective benefit bases (as defined in the contract prospectus). Some variable annuity contract owners, for example, may have account values that are well below the benefit base of their GMWB guarantee. As a result, withdrawals by these contract owners over time are more likely to be supported by payments of the guaranteed withdrawal amount from the issuing John Hancock Life Insurance Company. Since such a contract or policy owner is already being at least partially protected by the contract guarantee, the contract or policy owner will be less vulnerable to any further losses in his or her contract value than an owner of a contract having the same rider and having more value at risk because his or her contract value exceeds the benefit base. Certain variable annuity contracts include features that allow the guaranteed benefit base to increase or step up when contract value exceeds the guaranteed benefit (e.g., through appreciation). If the new investment strategy reduces upside performance during periods of high volatility, it may also reduce the extent to which a contract owner may benefit from this step up feature. You may wish to consider an investment option that offers continuous, greater equity exposure than one of the Lifestyle Trusts under such circumstances. 12. Do I have other investment options if I feel the new Lifestyle Trust s investment objective and policies are not appropriate for me? Yes. If the proposal is approved as to your Lifestyle Trust and you do not feel the new strategy is appropriate for you, you will have the ability to transfer to other investment options that do not use a 9
managed volatility strategy, without a penalty, or, alternatively, the ability to surrender your contract or policy. The John Hancock Life Insurance Companies have represented to the Lifestyle Trusts that: any contract or policy owner affected by the changes to the investment objectives and strategies will be allowed to transfer his or her contract or policy values to an investment option that does not use the new strategy from November 1, 2013 to July 1, 2014, owners may carry out the transfer of their entire investment out of any Lifestyle Trust to one or more other investment options without charge and the transfer will not be counted against the number of permitted transfers under the owner s contract or policy. See the prospectus for your contract or policy for the comparable investment options available to you. You should consult with your financial adviser to determine if an investment option, including the terms of your particular contract or policy, is appropriate for your situation. The investment adviser and John Hancock Life Insurance Companies do not provide investment recommendations to owners of contracts or policies. If you own a variable annuity contract or variable life insurance policy and feel the new investment strategy is not appropriate for you, and you do not wish to choose one of the alternative investment strategies available, you can choose to surrender the contract or policy. However, there may be adverse consequences to surrendering a specific contract or policy: surrender is a taxable event, and you may be subject to ordinary income taxes and penalties on some or all of the amounts withdrawn that represent income or gain you may have to pay withdrawal charges, and you will lose any guaranteed living benefits, annuity options, life insurance protection and/or any guaranteed death benefits under the contract or policy. Before you surrender your contract or policy, you should consult your financial adviser for advice about the nature and value of any benefits you might lose, and your ability to replace these benefits or lost value with other suitable products. You should also consult with your tax adviser about any tax consequences. 13. What are the risks of implementing these investment objective and policy changes? The Lifestyle Trusts may fail to achieve their investment objectives. In particular: The proposed strategies may not be successful, may limit upside potential in rising markets or may fail to limit losses. The historical quantitative models that the strategy will rely on may not accurately forecast future volatility or losses. Because futures contracts allow a Lifestyle Trust to obtain exposure (long or short) to an underlying asset that far exceeds the amount invested to achieve that exposure, the use of futures may magnify both gains and losses. Using short future positions to hedge a Lifestyle Trust s portfolios may result instead in losses if the assets that have been shorted appreciate. Unlike losses on long positions (which are limited to the amount invested), losses on short positions due to appreciation of the underlying asset are theoretically unlimited. Because the investment adviser intends to take short positions only on securities or baskets of securities owned or represented in the Lifestyle Trust s portfolio, any losses on short positions resulting from appreciation should be substantially offset by the corresponding long position in the portfolio. Because market conditions change, sometimes rapidly and unpredictably, the success of the proposed strategy will depend on the investment adviser s ability to execute the investment strategy in an efficient and timely manner. There may not be sufficient liquidity in the relevant financial markets to implement the desired position of the strategy, particularly in periods of high market volatility or distress. To the extent a Lifestyle Trust maintains cash collateral required to cover its obligations under the instruments used in its strategy, these collateral holdings may have the effect of reducing overall portfolio returns. In addition, because these collateral positions cannot be eliminated or reduced unless the corresponding obligation is eliminated or reduced, a large position may materially limit the investment adviser s flexibility in managing a Lifestyle Trust. Where an investment adviser to mutual funds is affiliated with an insurance company that uses the mutual funds as investment options for its insurance product offerings, there is the risk that the interests and activities of the insurance company may indirectly affect the management and policies of the mutual funds. Therefore, there is a risk that the John Hancock Life Insurance Companies might 10
indirectly affect the management and policies of the Lifestyle Trusts portfolios. We have adopted procedures to mitigate such potential conflicts. See Appendix A for a more complete description of these and other risks. 14. How do these changes impact the John Hancock Life Insurance Companies? In addition to investors experiencing adverse investment results, during the financial crisis the diversified asset class approach also resulted in insurance companies financial exposure, under the variable annuity contracts, variable life insurance policies and group annuity contracts containing various types of guarantees, to be much larger than anticipated. In addition, the significant decline in interest rates resulted in increased costs to insurance companies to hedge the associated guarantees. As a result of increasing equity market volatility and declining interest rates, under applicable insurance regulations, many insurance companies, including the John Hancock Life Insurance Companies, were required to increase their capital and establish significantly larger reserves against their guarantees and, in some cases, paid out monies pursuant to such guarantees. The John Hancock Life Insurance Companies, like several other insurance companies, have concluded, in light of unprecedented market volatility, that ongoing prudent financial risk management requires a number of sequential changes to the products they offer. As a further means of providing ongoing prudent risk management, the John Hancock Life Insurance Companies are seeking, for their contract and policy owners, investment options that generally provide a better means of managing volatility while also limiting the John Hancock Life Insurance Companies financial exposure on their outstanding contracts and policies that contain guarantees. If the proposal is approved, the John Hancock Life Insurance Companies will also benefit from a reduction in their potential investment risk which will reduce their costs of hedging this risk and may reduce their reserve and capital requirements. These financial benefits to the John Hancock Life Insurance Companies may be material. If the strategy is successful in improving the performance of the Lifestyle Trusts over time, the John Hancock Life Insurance Companies, and the Lifestyle Trusts investment adviser and subadvisers (John Hancock Asset Management and John Hancock Asset Management (North America)), both affiliates of the investment adviser, would also benefit from appreciated assets resulting in higher revenues from asset-based contract charges and asset-based advisory and subadvisory fees, as applicable. In particular, John Hancock Asset Management would benefit from increased subadvisory fee rates payable to it by the investment adviser, as described in Proposal 2. The investment adviser has advised the board that the proposed investment objective and policy changes would maintain the attractiveness of the Lifestyle Trusts for continued use on the John Hancock Life Insurance Companies platform of investment options supporting their variable annuity, variable life products and retirement plan services, while also offering the potential for superior riskadjusted returns for investors over the long term (7 to 10 years). 15. Do the changes involve competing interests between contract and policy owners and their insurance companies? Yes. As noted, the implementation of a managed volatility investment strategy will have the effect of reducing an insurance company s financial exposure under contract guarantees, which contract and policy owners have paid to obtain through charges imposed under those contracts and policies. The new strategies will generate certain related benefits for the John Hancock Life Insurance Companies, while potentially reducing the potential upside return for contract and policy owners in certain markets. It is expected that the John Hancock Life Insurance Companies will be given access to the total asset class exposures of the Lifestyle Trusts after they have been implemented in order to allow the John Hancock Life Insurance Companies to separately hedge their exposure under the contract guarantees. Although these companies will not be permitted to influence any decisions being made by the investment adviser and subadvisers, and will be prohibited from buying or selling shares of the Lifestyle Trusts on the basis of this information, without proper safeguards their hedging activity might adversely affect the prices of the underlying fund s portfolio holdings in the marketplace or their transaction prices. To mitigate this conflict, the John Hancock Life Insurance Companies have represented to the Lifestyle Trusts that they will primarily use short index futures to hedge equity exposure and that they will limit these indices and futures to those that are highly liquid. The John Hancock Life Insurance Companies have represented to the Lifestyle Trusts that the chance of any such adverse effects to the Lifestyle Trusts from the John Hancock Life Insurance Companies hedging activities under the circumstances is remote. Furthermore, the John Hancock Life Insurance Companies have represented that 11